Pratt Assumes Overrun Cost In Latest F135 Deal

Pratt & Whitney has agreed to assume 100% of the risk of any cost overrun for its latest F-35 engine contract, worth $1 billion. This agreement with the Pentagon aligns with the trend of recent deals with Lockheed Martin, the single-engine F-35 airframe manufacturer, in which the government is increasingly shifting the burden of cost overruns to industry.

The fifth low-rate, initial production (LRIP 5), contract—a fixed-price incentive-fee deal—covers 35 powerplants, including three spares, and comes as the company nears delivery of the 100th production-standard F135 engine. It comprises 29 conventional engines for 22 F-35As for the U.S. Air Force and seven F-35Cs for the Navy. The balance will be made up of three engines and related lift-system hardware for short-takeoff-and-vertical-landing F-35Bs for the U.S. Marine Corps.

Closure of the LRIP 5 talks comes as Pratt continues negotiations with the Defense Department over Lot 6. These are slated to wrap up this summer. LRIP 5 negotiations were protracted, and closure brings a welcome measure of production stability for the engine-maker as it struggles to meet earlier cost-reduction targets against a background of acquisition cutbacks.

Pratt's original plan, presented at the time of the 2009 Joint Assessment Team review, outlined a diminishing cost curve through Engine 250. However, that estimate anticipated a faster production rate, with delivery of Engine 250 in either the latter part of LRIP 6 or initial part of Lot 7. Subsequent purchasing delays shift the 250-engine milestone to Lot 8, so the cost curve will not level out until Lot 9 or later.

The company says it has managed to bring down costs by 40%, despite five successive cuts to the JSF program and a reduction of 400 engines from the original production plan. Pratt adds that it has “invested $60 million of our own money to help us claw our way down the cost curve, despite the Defense Department reprofiling the program of record.”

The engine maker, which recently shipped the 98th production unit, is facing significant challenges in its attempt to meet cost targets. The current production rate is steady at about 50 engines a year, roughly half of what was originally expected for 2013.

Projections now keep that volume flat until the ramp-up resumes, which is scheduled to occur in 2016. However, to safeguard the cost-reduction targets, Pratt will pay for any cost overrun in LRIP 5.

The engine-maker reached a tentative agreement on LRIP 5 as far back as early 2012 and completed final LRIP 3 deliveries in the first quarter of last year, around the same time it started deliveries of the first LRIP 4 engine.

While Pratt has taken a big step in assuming all risk of a cost overrun in LRIP 5, Lockheed Martin is on a more methodical path. Under the terms of the LRIP 5 deal, signed late last year, the company must absorb 55% of any overruns up to a ceiling of 112% of the target cost, with the government picking up the remainder, says Joe Dellavedova, the F-35 spokesman. Overruns on the airframe were evenly split in LRIP 4 up to a cost ceiling of 120%. The company is pushing hard to reduce labor costs, in particular, for the airframe.

The Pentagon's most recently released engine pricing is from LRIP 3. In that lot, each conventional engine cost about $16 million and each short-takeoff-and-vertical-landing engine for the F-35B was priced at $38 million. Pratt & Whitney vowed to reduce the engine price by 10% in LRIP 4. Company officials refused to provide per-unit pricing for earlier LRIPs or the target cost for LRIP 5.

The award of LRIP 5—and the forthcoming LRIP 6, for which Pratt says it provided its proposal last summer—are later than anticipated. “We are working closely with the government to improve and accelerate the contracting cycle for future production lots of propulsion systems,” says Chris Flynn, vice president for F135/F119 engine programs. Dellavedova says a combined deal for LRIPs 7 and 8 is slated for closure early in 2014.

In a statement marking the LRIP 5 award release, Flynn adds that “key factors in driving down cost will be to increase the ramp rate and volume of engines. Achieving greater program stability will help us to progress further down the cost curve to meet the price-reduction objectives on the program.”

So far the F135 has powered almost 3,120 flights, achieving 4,920 flight-test hours on the F-35 fleet. A total of more than 26,000 development and flight-test hours have been logged by the engine, which was derived from the F119 developed for the now out-of-production F-22.